Gordon \& Groton, CPAs, were the auditors of Bank \& Company, a brokerage firm and member of a national stock exchange. Gordon \& Groton examined and reported on the financial statements of Bank which were filed with the SEC.

Several of Bank's customers were swindled by a fraudulent scheme perpetrated by Bank's president who owned 90 percent of the voting stock of the company. The facts establish that Gordon \& Groton were regligent but not reckless or grossly negligent in the conduct of the audit and neither participated in the fraudulent scheme nor knew of its existence.

The customers are suing Gordon \& Groton under the antifraud provisions of Section 10

(b) and Rule 10b-5 of the Securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the president. The customers' suit for fraud is predicated exclusively on the negligence of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme.

{Required:}

Answer the following, setting forth reasors for any conclusions stated.

a. What is the probable outcome of the lawsuit?

b. What other theory of liability might the customers have asserted?